Britain election heats up, more hedging seen on GBP exposure

For the corporate clients in the UK, Europe and the US continents, general election in the UK on 7th May has been a center of attraction.

It is inferred from our recent finding that since 1979, Labour election victories have typically been positive for the GBP but negative for UK stocks, whereas Conservative victories have typically been negative for the GBP but positive for UK stocks.

Derivatives radar:

Corporate treasurers in Europe were also observing keenly on GBP exposure from a different perspective. With EUR/GBP close to the lowest levels since November 2007, corporates saw good value in raising FX hedge ratios on GBP exposure, particularly at a time when GBP receivables have been strong. More generally, European corporates perceive good historical value in raising hedge ratios to buy EUR against a number of currencies.

Ultimately, this election may most likely result in a minority government while GBP/USD option markets are already pricing in significant risk premium around the event. The spot markets look complacent to the risks. We look at GBP payables for outside Euro zone foreign traders from APAC and the US sides are quite riskier, thus we recommend,

Strategy: buy a "Bull call spread"
Overview: Bullish

Buy a Call and Sell another Call with a higher Strike Price with the same expiration date for a net premium payable.
This is worth using a Bull Call Spread over a long call when the cost of the long call is too high (like in the above explanation, high premium scenario owing to UK election) and the underlying currency is expected to move somewhat higher.
Credit from short call reduces the cost of long call.